EC390 Chapter Notes - Chapter 12: Nairu

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8 Jan 2017
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Ec(cid:1007)9(cid:1004): ch. (cid:1005)(cid:1006) the philips curve, the natural. The higher the unemployment rate, the lower is the wage, and the higher z. The parameter captures the strength of the effect of unemployment on wages: the larger the , the stronger is the (negative) effect of unemployment on wages. This can be manipulated into the relation among the inflation rate the expected inflation rate, and the unemployment rate: Is defined as the rate of changes of prices from last year to this year. Higher expected inflation leads to a higher inflation. Higher prices this year imply higher inflation this year and higher expected prices imply higher expected inflation. Given expected inflation, the higher the markup chosen by firms, m, or the higher the factors that affect wage determination, z, the higher is inflation. Given expected inflation, the higher then unemployment, the lower is inflation. In response to higher wages, firms increase their prices.

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